New Madoff Defense: "I Am That Stupid"

(MoneyWatch)  The Wall Street Journal is reporting this morning that several Madoff victims are being investigated as potential conspirators. Why? These rich philanthropists reportedly told Madoff how much they wanted to earn on their money. And then, magically, they did.

Could seasoned multi-millionaires really be stupid enough to think they could order investment returns like you'd order a burger? ("Gee, Bernie....I'm taking the kids to Tuscany this summer. It sure would help if I could earn, say, an extra 100 percent on that $10 million I gave you... You know how bad exchange rates are and all....") Investigators thus sort of presume that if you ordered up returns of as much as 950 percent, you might have had a pretty good inkling that you were participating in a fraud.

None of these wealthy investors have yet been charged with wrongdoing. And several told the WSJ that they're innocent. To prove it, however, they're going to have to dust off the "I really am that stupid" defense. The good news is that it has been used before. The bad news: not always successfully.

Consider the case of Irwin Schiff, one of the country's most notorious tax protesters, who published best-selling books claiming that the federal income tax system is a fraud and encouraging millions of people to stop paying income taxes. When federal tax authorities were prosecuting him for criminal tax fraud, his attorney had a simple strategy: You can't be convicted of criminal tax fraud unless you knowingly defied the law. (The standard is far lower when you're charged with civil tax fraud.) So Schiff's attorney said in legal filings that his client was completely delusional. No amount of reason could get through his thick skull. Schiff had, after all, been convicted of similar offenses twice before, thus the attorney was forced to heap insults on his client.

Unfortunately for Schiff, the judge didn't buy it. Schiff was convicted (again) in 2005 and sentenced to 12 years in prison. In 2008, the judge added 11 months for criminal contempt.